Most corporations pay quarterly dividends on their common stock rather than annu

Question

Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current dividend once a year and then pays this dividend out in equal quarterly installments to its shareholders. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))

a.
Suppose a company currently pays a $3.20 annual dividend on its common stock in a single annual installment, and management plans on raising this dividend by 6 percent per year indefinitely. If the required return on this stock is 12 percent, the current share price is $????? .

b.
Now suppose the company in (a) actually pays its annual dividend in equal quarterly installments; thus, this company has just paid a $.80 dividend per share, as it has for the previous three quarters. The value for the current share price is now $???? . (Hint: Find the equivalent annual end-of-year dividend for each year.)

Explanation / Answer

$56.53 +/- 1.0% Using the constant growth model, the price of the stock paying annual dividends will be: P0 = D0(1 + g) / (R - g) = $3.20(1.06)/(.12 - .06) = $56.53

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